Hong Kong: are paid non-compete periods worth the expense?

In a recent decision of the Hong Kong High Court, a six month non-compete restriction was upheld against an employee. One way that this decision differs from other recent cases, was that the employee was entitled to receive his usual salary for the entire non-compete period. In considering the balance of convenience, not only did the Court scrutinize the necessity of the post-employment restriction having regard to the proprietary technology and highly sensitive information that the old employer sought to protect, but it also looked at the minimal prejudice to the employee if prevented from taking up employment with the new employer.

Background

The First Defendant, Mr Mills (the Employee), worked for the Plaintiff, BFAM Partners (the Employer), as a Technology Consultant. His employment terms included a six month non-competition restriction (Non-Compete term) as well as post-termination non-solicitation, non-dealing and confidentiality obligations.

In February 2021, the Employee resigned. Once he completed the handover process in late April 2021, it was agreed he would go on garden leave for the last three weeks of his notice period. Unbeknownst to the Employer, the Employee began working as the Chief Technology Officer for the Second Defendant, Segantii, once his employment with the Employer ended (a fact that the Employer only became aware of in August 2021).

In June 2021, the Employer paid Mr Mill’s base salary for the first month of the non-compete period. The Employee returned the payment, stating that his employment had ceased on 21 May 2021 and therefore the payment must be in error. Further correspondence between lawyers for the parties ensued and it became clear that the Employee considered that the Non-Compete term was unenforceable, whereas the Employer sought to enforce it.

The balance of convenience

In this case, the Employer sought to enforce the Non-Compete term and obtain an injunction to prevent the Employee from working for Segantii until 31 October 2021, being six months from the last employment date with the Employer. As a trial before October 2021 would not be possible, the grant or refusal of an interlocutory injunction would dispose of the entire claim between the Employer and the Employee.

The Court set out the principles which apply when determining whether an interlocutory injunction should be granted to enforce a restraint of trade, such as the Non-Compete term. Specifically, where granting an interlocutory injunction which would practically dispose of the entire action, the Court must consider the balance of convenience and “take the course which appears to carry the lower risk of injustice, if it should turn out to have been wrong in the sense of: (1) granting an injunction to a party who would fail if there were to be a trial; or (2) in failing to grant an injunction to a party who would succeed if there were to be a trial”.

Was the Non-Compete term necessary?

The Court spent some time looking at what the Employer was seeking to protect via the Non-Compete term. The Employee worked closely with the Employer’s trading desks to advise traders on the technology to support their trading strategies and to create bespoke in-house technology or source other technology to enhance trading for the Employer. The Employer put on detailed evidence of the IT products and services that the Employee had been working on including his role in the design process of trading tools, the Employer’s Client Relationship Management system and its bonus calculation tool. From this work, the Employee was said to have close knowledge of the Employer’s trading strategies, proprietary technology and confidential information relating to investors and employees.

The Employee claimed that it was inherently improbable that he had retained such information in his head and that, in accordance with other contractual obligations, he had given back to the Employer all confidential information he had in his possession when his employment ended. The Court found that the Employer adduced sufficiently cogent evidence which identified the particular confidential information and trade secrets that the Employee had access to, and over which the Employer could legitimately claim protection via the Non-Compete term. Similarly, the Court found that, although the confidential information was complex and sophisticated, even though the Employee may not remember each aspect of the confidential information, he may still have a general impression of it. This also formed the basis for the Court’s finding that the Employer could not just rely on the confidentiality obligations and return of property provision, and why the Non-Compete term was also necessary.

Finally, the Court also accepted the Employer’s claim that a six month non-compete period (geographically limited to Hong Kong) was appropriate, as the life-cycles of trading strategies would be around six months.

Would the Employee suffer prejudice if the injunction was granted?

As the Non-Compete term provided that the Employee would be paid his base salary for the six month non-compete period, there was no suggestion that the Employee’s livelihood would be impacted if the injunction were granted. The Employer confirmed to the Court, that it would pay the Employee his base salary for the non-compete period if the injunction were granted.

Key takeaways

Hong Kong Courts are often reluctant to uphold non-compete provisions. The position in Hong Kong, as in many common law jurisdictions, is that covenants in restraint of trade are unenforceable unless they can be shown to be reasonable between the parties and in the public interest. The employer’s interest in protecting its business, is often outweighed by the detrimental impact on an individual’s ability to earn a living. Increasingly in other jurisdictions, there is also concern around the impact that restrictions on the free flow of labour can have on innovation and productivity. Even where an employer can demonstrate that an employee had access to confidential information, Courts often find that the protections afforded by confidentiality provisions are adequate and a non-compete is not necessary or appropriate given the prejudice to an employee.

Two key factors distinguished this case and should be borne in mind by employers seeking to protect confidential information and trade secrets:

• The Employer submitted detailed evidence which identified with precision the confidential information and trade secrets to be protected by the Non-Compete term. This information extended beyond client lists, general business strategy or employee information, and included particular trade secrets known by the employee and used by him in assisting the development of the Employer’s proprietary technology and business tools.
• The Employer was willing to pay for the protection it obtained by the Non-Compete term. This payment made the Non-Compete term more reasonable and precluded the Employee from demonstrating significant prejudice to him, if the Non-Compete term was enforced.